Tuesday, May 24, 2011

For clean energy investors, 2010 finished on a dismal note. A change of political control in Congress signaled diminished support in Washington for any kind of major financial incentives in alternative energy. In Europe, fiscal challenges led countries such as Italy and Germany to scale back their previous commitments to clean energy subsidies.

But a trio of factors has started to boost the outlook for the clean energy sector:

First, oil prices have spiked and are now at a level that makes technologies such as wind and solar much more competitive without the aid of subsidies. If oil prices stay aloft for a sustained period, then a fresh wave of solar and wind power programs is likely to begin.

Second, the nuclear disaster in Japan has led many to question whether it would be wiser to focus on environmentally-friendly technologies such as wind, solar and biofuels.

Third, the U.S. dollar continues to weaken, making U.S.-based clean energy plays look far more appealing in the eyes of foreign companies.

These factors help explain why French energy giant Total (NYSE: TOT) has made a 60% investment in California-based Sunpower (Nasdaq: SPWRA) for $1.37 billion. Total's offer for that stake was at a 44% premium to where shares had been trading. That got investors' attention.

As a result of the acquisition investors are now starting to sniff around other clean-energy plays in the United States, wondering which will be next. There are three U.S. clean-energy stocks -- two in solar and one in wind -- that could start to pop up on more radars. They're inexpensive, poised for strong growth and could be the target of mergers and acquisitions (M&A) hunters. Here they are…

1. First Solar (Nasdaq: FSLR)To complement its $6 billion wind-power business, GE (NYSE: GE) announced plans in April to become a major player in the solar power market within the next five years. Why did GE wait until 2011 to make such announcement? It's because the industrial giant has finally been able to boost its own technology, by achieving a 12% sunlight-to-energy conversion ratio using thin-film technology. This will enable GE to keep up with Chinese rivals, most of which focus on traditional silicon-based technology that costs more to produce but yields higher energy-conversion rates. GE executives figure the 12% ratio for the company's cheaper approach is still a market-beater.

If that's the case, then First Solar -- the pioneer of thin-film technology -- can really boast. On a May 3 conference call with analysts, the company's executives noted the cost-effectiveness of thin-film using a slightly different measure. First Solar can make a panel of power that produces one watt of power for just $0.71. It's hard to compare that with GE's 12% energy conversion target, but First Solar believes its approach will remain as the most inexpensive. Any potential suitor would be able to immediately establish technology leadership.

Right now, First Solar is feeling the ill effects of the late 2010 industry slowdown. Demand slumped and industry inventories built up, leading the company to issue second-quarter guidance below analyst forecasts. A key 290 megawatt (MW) project, known as Agua Caliente, has also been postponed from the second quarter to the third quarter of this year.

It will likely take until the end of the third quarter for results to appear robust relative to forecasts again. As a result of the tepid outlook observed in the recent conference call, First Solar shares are back below $130, the lowest level in nearly six months. The stock now trades for just 12 times next year's projected profits, the lowest forward multiple in a number of years. With shares down $50 from the 52-week high, potential buyers may spot a bargain, especially foreign suitors that can take advantage of the weak dollar.

2. GT Solar (Nasdaq; SOLR)When it comes to actually producing traditional solar panels made of thick, silicon-based modules, it's hard to compete with Chinese manufacturers. Investors need to focus on the companies providing the advanced technologies used by these high-volume manufacturers such as N.H.-based GT Solar, which provides reactors and furnaces used at major Chinese factories. GT Solar is considered by many to be the industry's leader.

Anyone looking to acquire GT Solar would inherit a very stable business. Current backlog of $1.2 billion represents about 18 months worth of business. And unlike many solar businesses that are hoping to grow their way into positive free cash flow GT Solar is already there, having generated roughly $150 billion in free cash flow in fiscal (March) 2010.

Despite the healthy backlog, strong free cash flow and solid technology base, GT Solar could be acquired for a reasonable price. Shares trade for less than eight times projected fiscal (March) 2012 profits. A buyer could pay a 50% premium and get the business for about 12 times projected 2012 profits. Alluding to the recent positive developments for the solar-power industry, Brean Murray analysts note that "small-cap niche stocks such as GT Solar are likely to benefit from the broader macro improvements in the solar industry." They see shares rising from a recent $10.50 to around $15.

3. Broadwind Energy (Nasdaq: BWEN)Shares of this wind-equipment maker are getting a decent lift on Monday (May 9) from solid first-quarter results. Sales of $43.5 million were roughly 10% ahead of forecasts, enabling the company to eke out a small operating profit against expectations of a small loss. Management also noted that orders in the quarter were strong, setting the stage for an improved second quarter as well. Although shares have slumped badly in the past two years thanks to a slowdown in wind-turbine spending, the worst looks to have passed. Backlog looks stable at about $225 million, the company has sufficient cash on hand to deal with the lean times, and it is likely to see rising interest as investors focus deeper on M&A possibilities in the sector.

As I noted back in December rumors circulated that GE and others may be looking at acquiring the company. Even in the absence of M&A activity, shares look attractive at less than one times projected sales.

Action to Take --> As noted earlier, solid reasons are emerging to take a fresh look at clean-energy stocks. M&A opportunities help, but the fundamentals alone make this sector more appealing to investors now that oil is pricey and nuclear power's prospects have become dicey. Any of the three stocks discussed above are solid candidates for investors.